Understanding the difference between sustainability and ESG

Sustainability and Environmental, Social, and Governance (ESG) are the new words being used prolifically in business and environmental conversations, but they are not well understood.

Even their application is not well understood, and companies have been found wanting in the introduction of these concepts that are now being demanded by society in general. So, what defines the difference between these two concepts, and why is it important to understand this difference?

Sustainability (how companies impact the world) is a broad concept that originated from the field of ecology and was later expanded to include economic and social aspects. It refers to the ability to meet the needs of the present generation without compromising the ability of future generations to meet their own needs. This idea is based on the three pillars of sustainable development: economic, social, and environmental.

Primary goal and criteria

The primary goal of sustainability is to achieve a balance between these three dimensions, ensuring long-term prosperity and well-being for society. ESG,  how the world impacts investment and companies, is a framework that evaluates the environmental, social, and governance performance of companies, investments, or projects. This set of criteria helps investors and other stakeholders assess the potential risks and opportunities associated with a particular entity.

ESG factors are integrated into decision-making processes for the purpose of promoting responsible and ethical practices.

More specifically for ESG factors, environmental factors include aspects such as pollution, waste management, climate change mitigation, and resource conservation. Social factors encompass issues related to human rights, labour practices, diversity, and community engagement. Governance factors involve the quality of a company’s management, board composition, shareholder rights, and ethical conduct.

Sustainability is a broader concept that covers the overall balance between economic, social, and environmental factors to ensure long-term prosperity, whereas ESG is a specific set of criteria used to evaluate the performance of companies, investments, or projects in the context of environmental, social, and governance issues.

Key differences

Understanding the difference between sustainability and ESG is important for several reasons. They have different goals and focuses: Sustainability encompass a broader perspective, aiming to balance economic, social, and environmental aspects for the long-term well-being of present and future generations. ESG, on the other hand, is a more specific framework used to assess the environmental, social, and governance performance of companies, investments, or projects.

Recognising the distinction between these two concepts helps stakeholders address their unique objectives more effectively. Investors, businesses, and policymakers can make better informed decisions by differentiating between sustainability and ESG.

While sustainability provides a holistic approach for long-term value creation, ESG focuses on identifying and managing specific risks and opportunities associated with a company or investment.

Understanding this distinction enables stakeholders to make more targeted and strategic choices.

Performance measurement and reporting also differ for both concepts.  Companies and investors increasingly use sustainability and ESG metrics to measure and report their performance. Sustainability and ESG are subject to different regulatory frameworks and voluntary standards.

Understanding the difference between these concepts can help businesses and investors ensure compliance with relevant regulations and adopt appropriate best practices. Lastly, different stakeholder groups may have varying interests in sustainability and ESG issues. By understanding the difference between these two concepts, companies can better engage with stakeholders, address their concerns, and create shared value.

But how do sustainability and ESG deliver value?

The premise of delivering value revolves around the move from value transfer, ‘shareholderism’,  to value creation, ‘stakeholderism’, and if the company achieves this there are many increased value propositions possible.

Both ESG and sustainability best practices deliver value because they help companies address risks and opportunities associated with environmental, social, and governance issues, which can ultimately contribute to their long-term value creation. By integrating ESG and sustainability best practices, companies can proactively identify, monitor, and manage risks associated with environmental, social, and governance issues, such as climate change, labour relations, or regulatory compliance.

This helps protect the company’s reputation, assets, and overall value.

Sustainable business practices often lead to improved operational efficiency through better resource management, waste reduction, and energy conservation. This results in cost savings to the company and employees and can enhance a company’s competitiveness.

Emerging innovation

Companies that embrace sustainability and ESG best practices are more likely to develop innovative products and services that address emerging market demands and societal challenges. This can open new markets and revenue streams.

Investors are increasingly considering ESG factors in their investment decisions. Companies that demonstrate strong ESG performance and commitment to sustainability can attract capital from a growing pool of responsible and impact investors, potentially resulting in lower capital costs.

Companies with a strong sustainability and ESG focus tend to have higher employee engagement, especially for Gen Zees and are more likely to attract and retain top talent. A motivated and skilled workforce contributes to better overall performance.

Consumer concerns

Consumers are increasingly concerned about the social and environmental impacts of the products and services they purchase. Companies that adopt sustainable and responsible practices can build customer loyalty and brand reputation, enhancing their market position. By adhering to ESG and sustainability best practices, companies can stay ahead of regulatory changes, ensuring compliance and avoiding potential fines, penalties, or reputational damage. Companies with good governance have better returns than those without.

By considering the long-term implications of their actions and decisions, companies that adopt ESG and sustainability best practices can create sustained value for their shareholders and stakeholders, contributing to overall financial performance and resilience.

Companies that follow ESG and sustainability best practices are more likely to maintain the trust and support of the communities in which they operate which gives them the social license to operate.

ESG and sustainability practices contribute to a company’s positive impact on society and the environment, addressing global challenges such as climate change, inequality, and resource scarcity.

In short, understanding the difference between sustainability and ESG is crucial for effective decision-making, risk management, performance measurement, regulatory compliance, and stakeholder engagement. Recognising the unique goals and focuses of each concept can help businesses, investors, and policymakers create long-term value while promoting responsible and ethical practices.

Chris Blair is CEO of Leadership & Sustainability of 21^st Century.